The ongoing trade war uncertainty between the U.S. and China, the inversion of the U.S. yield curve (the ten-year Treasury bond yield dipped below the two-year Treasury bond yield at the end of August), and the weaker than expected August job gains are enough to fuel fears of a recession.
But a closer look at the labor data and other economic data, as well as the latest Fed talk, continues to defy recession worries. In fact, in September, the S&P 500 Index has been rising towards the all-time high reached on July 26, 2019, just about 25 points away as of September 12, 2019.
Underlying the Labor Data
The August non-farm payroll growth was 130,000, lower than the expected 150,000. Stripping away the government payrolls gains, private payrolls only rose 96,000. However, the August payroll numbers are traditionally volatile due to seasonality. Goldman Sach’s Hatzius pointed out that the initial payroll numbers for August were often revised higher later – a rise of 81,000 in 2018, 31,000 in 2017, and 122,000 in 2011.
The July Job Openings and Labor Turnover Survey (JOLTS) showed that the job openings exceeded available workers by 1.17 million while the quits rate, a measure of worker confidence, rose 0.1% to 2.4%, exceeding the highest level reached in 2005.
According to the latest National Federation of Independent Business Survey, which polls small businesses, 57% of respondents cited that finding qualified workers is still very challenging.
Recently, the Fed chairman Jeremy Powell reiterated that the U.S. economy has continued to perform well – growth is moderate, the labor market is strong, and inflation will move back to its two percent goal. The more moderate August job numbers suggest that the Fed will continue to ease in the September meeting to support the economy. However, Goldman’s Hatzius cautioned that while the rate cuts in September and October are fully expected, as inflation moves up and growth stabilizes at around the 1.75% level, there will be less room for rate cuts going forward.
Citi Economic Surprise Index Shows Optimism
The Citi Economic Index, a measure of data surprises relative to market expectations, has climbed back to the positive territory (+7) since September 4, compared to the -68.3 reading at the end of June. A positive reading means that the data releases have been stronger than expected, contrary to what the market has been worrying.
Yield Curve Inversion Reverses
The ten-year U.S. government bond yield has rallied by close to one percent year-to-date, driving the ten-year rate to dip below the two-year rate. The yield curve inversion has traditionally been an accurate predictor of U.S. recessions. The bond yield curve has stopped inverting since the end of August as more optimistic news on the trade talk and from the Fed set in.
While the labor market and economic growth are moderating, the overall economic data should defy recession fears. Still, the rise in uncertainty in politics, global trade, and corporate spending are causing the Fed to pay close attention to the downside risks.